Exercise 1

Making special pricing decisions

Suppose the Baseball Hall of Fame in Cooperstown, New York, has approached Hungry-Cardz with a special order. The Hall of Fame wishes to purchase 55,000 baseball card packs for a special promotional campaign and offers $0.33 per pack, a total of $18,150. Hungry-Cardz's total production cost is $0.53 per pack, as follows:

Hungry-Cardz has enough excess capacity to handle the special order.

Instructions

1. Prepare a differential analysis to determine whether Hungry-Cardz should accept the special sales order.

2. Now assume that the Hall of Fame wants special hologram baseball cards. Hungry-Cardz will spend $5,000 to develop this hologram, which will be useless after the special order is completed. Should Hungry-Cardz accept the special order under these circumstances, assuming no change in the special pricing of $0.33 per pack?

Exercise 2

Making dropping a product decisions

Top managers of Best Video are alarmed by their operating losses. They are considering dropping the DVD product line. Company accountants have prepared the following analysis to help make this decision:

Total fixed costs will not change if the company stops selling DVDs.

Instructions

1. Prepare a differential analysis to show whether Best Video should drop the DVD product line.

2. Will dropping DVDs add $43,000 to operating income? Explain.